Pride, Inc. owns 80% of Simba, Inc.’s outstanding common
stock. Simba, in turn, owns 10% of Pride’s outstanding common
stock. What percentage of the common stock cash dividends
declared by the individual companies should be reported as dividends
declared in the consolidated financial statements?
Dividends declared by Pride
Dividends declared by Simba

90% 0%
90% 20%
100% 0%
100% 20%

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(a) When two companies own stock in each other, a
reciprocal ownership relationship exists. In this case, Pride (the
parent) owns 80% of Simba (the sub), and Simba owns 10% of
Pride. When Pride declares a cash dividend, 90% of it is distributed
to outside parties and 10% goes to Simba. Because Simba is
part of the consolidated entity, its 10% share of Pride’s dividend
is eliminated when determining consolidated dividends declared.
Thus, only 90% of dividends declared by Pride will be reported in
the consolidated financial statements. When Simba declares a
dividend, 80% of the dividend is distributed to Pride (the parent),
and 20% is distributed to outside parties (the noncontrolling
interest of Simba stock). The 80% share to Pride is eliminated
when determining consolidated dividends declared
because it represents an intercompany transaction. The remaining
20% to the noncontrolling interest is likewise not included in
consolidated dividends declared because, from the parent company’s
point of view, subsidiary dividends do not represent dividends
of the consolidated entity and must be eliminated.